Businessweek Archives

What Russians Really Make

October 15, 1995

Economic Trends

WHAT RUSSIANS REALLY MAKE

What's going on in Russia? Economists are scratching their heads over the yawning gap between income and wages in post-communist Russia. Since 1990, real wages have plunged by more than 60%, while real national income has barely budged. One reason may lie in a shift in employee compensation from wages to other types of income, says Gregory Fossedal, director of emerging markets at Lehrman Bell Mueller Cannon Inc., an economic forecasting firm in Arlington, Va.

Labor income is heavily taxed in Russia, with a top income-tax rate of 62% on $10,000 a year and 49% on $5,000. In sharp contrast, taxes on business and property income range from 28% to 38%. Thus, companies are increasingly paying some of their workers' salaries in stock, dividends, and other lower-taxed income, says Fossedal.

One tactic is for an employer to open a special, high-interest account in a bank for employees. The gains in these accounts are taxed at 12% to 38%, without Social Security taxes. Companies can also use these banks to arrange loans at 1% interest to employees, says Fossedal. The number of Russian commercial banks has grown from fewer than 700 at the end of 1991 to more than 3,500 today, and some of this growth is tax-related. Perhaps "bank" is becoming less of a four-letter word in Russia.BY CHRISTOPHER FARRELL